The Hindu Business Line : McCarthyspeak!

The offshoring wave hitting Indian shores is going to have a backlash not because of legislation, but because of customers going for a `get rich quick' fad. — John C. McCarthy, Group Director, Research, Forrester Research.

HIS research (for Forrester) on 3.3 million service jobs going from the US to countries like India by 2015 has been at the centre of the offshore debate since late 2002. As the prospects of an outsourcing backlash from the US hogged the limelight at the recently-concluded Nasscom 2004, the emotional issue of loss of jobs, as suggested in the Forrester research paper, kept coming up for discussions. John C. McCarthy, Group Director — Research, Forrester Research Inc, US who authored this research paper, however, has a different take on the `outsourcing backlash'. McCarthy, who was in Mumbai recently as one of the key invitee speakers at Nasscom 2004, offered some interesting insights on the challenges facing the Indian software industry.

Excerpts from an interview to eWorld:

Do you continue to maintain your view about the movement of 3.3 million jobs by 2015 to countries such as India? Or are you likely to revise your estimates?

It is totally conservative. In the near term, we have tried to be as accurate as possible. But in the long term, we were intentionally conservative, because we knew there could be some kind of controversy around it. There are some issues that are going to start to play out towards the end of this year into next year. I have a totally different perspective on offshoring. Everybody here (at the Nasscom 2004 conference) wants to talk about backlash.

The backlash is not going to be because of legislation. The backlash is going to be because a whole bunch of companies are jumping onto offshore because it is a fad or a `get rich quick' solution to their problems. They have some unrealistic expectations about how quickly they are going to be able to do it and what it takes to do it. By the end of this year and in the next year, you are going to see some high-profile failures.

Why do you think customer expectations will not be met... ?

The customer's expectations will not be met given the lack of investment the customer is willing to make. It is not that their expectations are unreal, it is the expectations given what they are willing to invest in the work they are going to do. Success is an equal part of vendors and their capabilities, and clients and their capabilities.

In the case of the Spectramind - Lehman Brothers deal, there were problems on both sides. Part of the problem with Lehman was that they went to Spectramind for a very complex application and probably it is not something you want to do offshore. Conversely, there were skill issues on the Spectramind side. Lehman had not offshored anything until two years ago. So, they did not have a culture. We did a (research) piece where there is an evolution that people go through when they go offshore. It (Offshoring) is not binary — you do it or you do not. Instead, it is an evolution that you go through. You as a customer ramp up your sophistication, your processes, governance and management. And helpdesk is at the end of that migration (the BPO value chain). Somebody like Citibank or GE who has been doing this for years, they can look at helpdesk. For somebody who is just starting, it doesn't make sense.

Is it a kind of maturity problem that India is facing at the moment... ?

I think it is the hype that has overestimated the maturity on both sides. Overstating what the vendors can really do, and users overstating what they can offer.

You have said that there could be some high-profile failures. What could trigger these failures...?

I think you are going to see a combination of things. Not all the vendors are going to grow at the same rate. Part of the maturity we are going to see over the next two years is a much greater segmentation of the vendors. It is not going to be Indian services or BPO. It is going to be the vendor doing vertical banking software from India or doing Java over here. The top-tier vendors are becoming multiple-line service firms. Particularly, some of the second or third-line vendors will have to start picking themselves up. They have not grown at the same rate in different types of projects. They have got to take a good hard look at the mirror and say: What are we going to do? What is our focus going to be? Because we are not going to be the next Infosys out of India, leave alone the next Accenture out of India. Only those who have niche-based focus will last the course. Some of them will end up becoming bigger than others, depending upon which niche they target and how effectively they build the marketing to go at it.

How successful will the global multinationals such as IBM or Accenture be in coming down the software value chain and setting up operations in India? How much of a threat do they pose to Indian companies?

There are a couple of ways to look at that. First of all, they (global multinationals) are just ramping up. They are a threat to the Indian vendors, in the sense that these players have pretty significant account visibility and in some cases, significant account control. But what you must realise is that if you talk to the big customers, even among sophisticated offshore providers, they do not have any particular choice (about placing orders). IBM and Tata, Wipro and Accenture and in some others, Wipro and Tata. Most of these big customers are using a combination of all of these vendors. So, the notion that IBM gets all the services business out of any account is as naive as to think that Wipro gets it.

IBM and Accenture have stated that they do not see Indian vendors in the $100 million deals and above. How do you think that Indian companies can enhance their competitive advantage?

Do you think IBM was in the GE Medical deal list until two years ago? The Indian vendors have basically filled the void. Accenture and IBM did not want to touch anything under $10 million so far. Custom development, no. We are all about packages and business process re-engineering. So, they (global multinationals and Indian companies) did not compete to begin with.

Can the Indian companies move up the software value chain faster than the global multinationals can come down?

There are going to be successes and casualties on both sides. Let us step back and see this issue. The industry is waking up to the fact that they have seen the top of IT spending. It is past and it is over. No more double-digit increases in IT budgets. There is more and more of technology coming in every day. A big part of what is happening is everybody out there has to do `more IT for less'. The clients, the vendors — for everybody this is a cost play. We are in a period of IT-deflation. That is what is driving the big service multinationals to cut their prices and there are a good number of clients out there — 60 per cent of the Fortune 1000 companies cannot spell `India'. (have not offshored to India)

Where will the margins of Indian companies settle and how do you think they will be able to meet the margin challenges, going forward?

I think you are going to see an equalisation (of margins), probably somewhere in the middle between the multinationals and the offshore boys. The offshore boys are always going to have a slightly lower cost structure because their corporate management is in India. Despite the rise in Bangalore real estate prices, the overhead of Infosys, from a management point of view, is a lot less than that of IBM. Conversely, IBM's cost structure is set up in a G7 country.

Do you think Indian players operating out of India instead of multiple geographies will be put at a competitive disadvantage in the future?

Both the camps are climbing the same mountain from different sides. It is called the Global Delivery Model. The US vendors are climbing it from a very different side, with a different route than the Indian vendors'. The challenge for the Indian vendors is more locations, not just India. How to put the man with the business expertise in place, account management in place onshore. The US vendors are trying to figure out multiple locations as well. But they are also trying to figure out: how do we change their processes to deal with the fact that all the work is not going to be done locally anymore; And how do we change our culture to be one which is all about big cost structures? The challenge for IBM is to going to be changing their culture around costs. The challenge for Wipro and Infosys is going to be: how do we build the domain expertise into their culture? So, both the parties need to make physical investments, process investments and cultural changes. And let me tell you, it is the cultural changes that are going to kill some of these guys. Not everybody is going to survive.

Among the two camps, which is going to be a more realistic and achievable strategy?

Both the strategies are realistic. This is an evolution in the IT services business. Every time we have had one of these evolutions, there are some people who step up to the challenge and there are others who do not. There have been two myths that have been handed down to me by the multinationals and the Indian vendors. Myth No. 1 by the Indian vendor: No person in India is ever going to go and work for IBM. Conversely, Myth No. 2: no person who works in India can spell business. Both sets of vendors are in equal amount of denial. Indian vendors do not have anything which is insurmountable. Conversely for global MNCs. It is likely that one of them will fail internally. The cultural shift is going to take three to four years on both sides.

Do you think that Indian vendors have been tentative with their acquisition strategy, considering the deals which Wipro and Infosys have put through?

I think that it is smart. They do not have the management depth to do some big deal where they are going to swallow a billion-dollar company. No way. We are not going to get one deal that will put you in a critical mass and domain expertise in 10 verticals. They are better off to pick and choose these companies such as Nervewire which has particular expertise. They do not need some big, unfocussed deal. It is going to be lots of $10-20 million deals. It is not going to be $500 million to $1 billion deals. We are highly unlikely to see some `blockbuster acquisition'. The big account re-engineering deals are out of favour with Wall Street.

Do you think the importance of innovation has diminished and focus has shifted to execution over the years?

In technology, we are `out of the hitting sixers' mentality. There is plenty of technology and innovation that is going to happen. But it is going to be innovation around the intersection of technology and business process and not just the technology. That is the difference. And that is why domain expertise has become so important.

How compelling is India likely to be as an outsourcing destination say, 5 to 10 years down the line?

We are not going to look at a one-hop world. From the US to India or the UK to India in five years. It is going to be the same way as manufacturing — basic assembly in China, sub-assembly in Singapore. It is going to be a global delivery model.

Do you think that the Global Delivery Model is only one of the building blocks and we do not know the next step of the chain?

There are going to be new technologies which have to be integrated. But each of those new technologies will have new business problems. We are talking about integrating RFID for the retail industry. The cost of that technology is nothing. So, you have got to figure out how to optimise your costs.

What will be the value differentiators for the industy, going forward?

Value differentiators will have to focus around a combination of things. Domain expertise and your processes. The companies are still in the first stage of it. How many people do they have with 10 years of vertical experience. But you are not going to change the game in this quarter. This is a three-year migration for Indian vendors. Just as hiring 20 people in India is not going to change the cost equation for IBM either. Each of these guys has a huge set of challenges and a set of strengths.

maverick@thehindu.co.in

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